Investing in the FTSE 100

There’s a good chance you’ll know the term ‘FTSE 100’, and associate it with the UK stock market. But do you know how the London Stock Exchange-owned FTSE Russell builds and manages the FTSE 100 index, and why the index is significant around the world? Allow us to explain...

What is the FTSE 100?

First things first. The FTSE 100 is an index of the 100 largest stocks on the London Stock Exchange in the premium listing category. It acts as the benchmark for the UK stock market globally.

When you hear about UK stocks and shares on the news, there’s a high chance that commentators are talking about the FTSE 100.

So, where does its name come from?

The ‘FT’ part of FTSE originally came from the Financial Times and ‘SE’ from London Stock Exchange, the two companies which launched in the index in 1984. The name FTSE is now part of the FTSE Russell brand owned by the London Stock Exchange.

What are the top companies in the FTSE 100?

FTSE 100 shares tend to be household names. Some top companies in the FTSE 100 include drugs maker AstraZeneca and oil producer Shell.

About three quarters of FTSE 100 companies do business beyond the UK, including Unilever and Reckitt, which engage in household products spanning food, healthcare and hygiene.

In terms of sectors:

• Energy, industrial goods and services, financial services and healthcare each account for approximately 11% of the index, as at the start of 2024.
• Banks, tobacco, food, personal care, mining and packaging companies are also well-represented.

What’s interesting is the limited exposure to technology companies – there’s only a fraction compared to what you might find on the main US stock markets. This has been one of the criticisms of the UK market. Investors have to look elsewhere for tech exposure among larger companies, although there are more smaller tech names on the London Stock Exchange.

Given how crucial technology is to consumers and businesses, it wouldn’t be a surprise to see greater tech exposure in the composition of the FTSE 100 index change over the coming decades.

For now, the FTSE 100 continues to have the reputation of being an ‘old economy’ index. That isn’t necessarily bad – the companies within it are still capable of growing earnings and most pay a rising stream of dividends. Which is important, as historically those two factors have been key drivers for share prices.

How does the FTSE 100 work?

Once a quarter, the index provider FTSE Russell takes the 100 biggest companies on the London Stock Exchange that meet certain criteria for listing category and liquidity. The largest companies have a greater influence on the performance of the index as it's weighted by market capitalisation.

At the end of every quarter, FTSE Russell looks at the market value of companies in the FTSE 100, as well as the mid-cap index FTSE 250, which contains the next 250 biggest companies on the London market with a premium listing.

If a FTSE 250 company has performed well and become more valuable than another company at the bottom of the FTSE 100, it would be promoted to the FTSE 100 at the quarterly reshuffle. And any FTSE 100 names which have dropped below the threshold would be relegated.

This is how it works in practice:

• Promotion to the FTSE 100: Any company not currently in the FTSE 100 but which would be in 90th position or higher in terms of market value.
• Relegation from the FTSE 100: Any company in the FTSE 100 which has fallen to 111th position or below in terms of market value.

The quarterly reviews happen in March, June, September and December. They also look at any companies that have recently joined the stock market – through what’s known as an IPO or initial public offering – and assess whether they’re large enough to join the FTSE 100 or another index.

How to invest in the FTSE 100

There are several different types of investments that can give you exposure to the index: